AG: the Netherlands has to allow the 'per element approach'
The CJEU’s AG in essence concludes that the Netherlands may not favour domestic situations by allowing a benefit that is not open to cross-border groups.
26 oktober 2017
- Facts and circumstances
- Interest deduction and capital losses
- Coincidence with fiscal unity
- Opinion AG: violation
- Emergency remedial measures
Facts and circumstances
On 25 October 2017, the AG expressed his opinion on two cases the Dutch Supreme Court had referred to the CJEU: one case on Dutch anti-profit shifting rules (art. 10a CITA 1969) and one on deduction of currency losses. The CJEU treated these as consolidated cases and the AG in essence opined that the Netherlands is not allowed to favour domestic groups by allowing neutralisation of tax provisions following the creation of a fiscal unity.
Interest deduction and capital losses
The first case concerned application of the limitation of interest deduction under art. 10a CITA 1969. In certain situations, Dutch laws restrict deductions of interest to avoid base erosion, without distinguishing between domestic and cross-border situations. However, in fully domestic situations, taxpayers can avoid application of art. 10a CITA 1969 by creating a fiscal unity with the Dutch group company. By doing so, loans will become invisible for tax purposes as they get lost in the fiscal unity thus ruling out limitation of interest deduction.
The second case was about the rules for capital losses. In the Netherlands, positive currency results from participations are basically tax-exempt, while exchange rate losses are non-deductible under the participation exemption. In this case capital losses were sustained on a British participation of a Dutch parent company during a group’s restructuring process. The deduction of these losses was disallowed with reference to the participation exemption. Yet these losses could effectively have been deducted had the Dutch parent company and the British subsidiary been able to form a fiscal unity, which would have permitted the British subsidiary to be treated as a permanent establishment.
Coincidence with fiscal unity
The similarity between both cases is that, in principle, national rules equally apply to domestic and cross-border situations. However, restrictive legislation can be avoided by forming a fiscal unity in a domestic situation. Since fiscal unities can only be formed between Dutch based companies, a combination of these rules on the one hand and a fiscal unity on the other may constitute a violation of EU law. In the similar French Groupe Steria case, the CJEU likewise ruled that this concerns an infringement of the freedom of establishment.
Opinion AG: violation
The AG opines that the Dutch rules basically constitute a violation of EU law, particularly in the case of the interest deduction limitations where all of the interest would be deductible since no contaminated transaction is manifest in the fiscal unity. Cross-border situations do not qualify for this benefit and the interest deduction potentially remains limited because fiscal unities are only open to domestic situations. The AG dismisses the Dutch argument that the interest deduction limitation is an anti-abuse rule by arguing that Netherlands obviously disregards anti-abuse rules in fiscal unity situations.
The AG’s opinion on the currency capital losses is, however, divergent. He refers to a previous (Swedish) CJEU case, in which the Court already judged that deduction of capital losses may be disallowed. In the present case, the AG seems to opine that a direct link between the rules on currency capital losses and the fiscal unity is absent.
It remains to be seen whether the CJEU will follow the AG’s opinion. If the Court judges the Dutch rules to constitute a violation of EU law, the potential impact of creating a fiscal unity should be assessed for each statutory provision individually (per element).
Emergency remedial measures
Almost immediately after publication of the AG’s opinion, the State Secretary for Finance announced emergency remedial measures should the CJEU decide to follow it. Tighter rules for domestic situations are proposed to bring about equal treatment in domestic and foreign situations. This means that some corporate income tax and dividend withholding tax rules will have to be applied as if no fiscal unity exists. This would prevent the most vulnerable elements of fiscal unities in domestic situations from translating into more favourable treatment than in comparable EU situations. The emergency remedial measures are shaped such that they can also affect existing fiscal unities.
Should the CJEU indeed follow the AG’s opinion, the measures announced will be presented as a bill to the House of Representatives in the shortest possible term. That bill will have to provide for the measures taking retrospective effect to Wednesday 25 October 2017, 11:00 hours.
A new legally and practically future-proof group scheme will then replace the emergency remedial measures within the near future. It is yet unclear which solution is preferred. Possibilities range from permitting a fully cross-border fiscal unity (excluding cross-border loss set-off) to replacing the current regime by a more profit-focused variant (such as a group relief system). Another, less obvious possibility is to altogether cancel the fiscal unity regime.
Source: Opinion AG of the CJEU of 25 October 2017 in consolidated cases C-398/16 (X) and C-399/16 (X)